The outgoing head of the MPs' expenses watchdog is calling for the introduction of substantial taxpayer funding of political parties if Britain is to avoid another major scandal that damages the democratic process.

On the day he stands down from the Independent Parliamentary Standards Authority, Andrew McDonald (pictured below) says a significant increase in public money should be made available, coupled with controls on donations and spending, if politicians are to halt an "erosion of trust".

His words, in an article in the Guardian, will resonate with Labour and Liberal Democrats figures who have yearned for an increase in state funding but felt unable to say so in public. The Conservatives have a longstanding opposition to further state funding but recognise the need for reform.

McDonald, who was senior adviser to Sir Hayden Phillips in his 2007 review of party funding, makes his comments as he ends four years as Ipsa's chief executive. He is leaving his post after learning last year that he has incurable prostate cancer.

In the article, he says Britain's parties are hiding from potential scandals by not confronting the problem of funding. "Shifting [party funding] from the 'Too Difficult' tray will require leadership and courage, especially at a time of austerity," he writes.

He adds that the "main contours of a solution are now well established: caps on donations; tighter controls on general election spending; tougher regulation of third party expenditure and greater transparency on the sources of party income", before moving on to taxpayer funding.

In concluding, McDonald says: "And yes, any solution will require a significant increase in public funding of parties. Of course the taxpayer funding will be unpopular, but surely it is to be preferred to the next scandal over party donations and the further erosion of trust in our political system."

Opposition parties already receive some state funding to pay administration costs. Labour receives about £5m a year in Short money – named after the late Labour politician Edward Short – while members of the House of Lords receive so-called Cranborne money. There is also a general policy development grant available to parties with two MPs or one MP and one MEP.

McDonald does not specify the sums required, but he was a leading member of the team behind proposals put forward by the Phillips review in 2007 which included capping spending for political campaigns as well as limiting individual donations and increasing state funding by £25m a year, linked to public support. It is understood that McDonald believes a similar sum is required today.

Sir Hayden proposed that eligible parties receive 50p each year for every vote cast for them in the most recent General Election and 25p for every vote in the most recent ballots for the Scottish Parliament, Welsh Assembly and European Parliament. But his proposals were ignored.

In 2011, the committee on standards in public life advocated radical changes including a £10,000 annual cap on donations and a £3-per-vote state funding for the parties, representing £23m a year over five years. The proposals were rejected by the Westminster parties as politically untenable during austerity cuts.

All-party talks on party funding reform were abandoned last summer after the three main parties could not find sufficient common ground. In December, Ed Miliband ruled out introducing state funding of political parties amid disquiet amongst advisers' fears that it would provoke a backlash.

Labour supports a £5,000 cap on donations to political parties. Tory sources have said they would not contemplate a cap as low as £10,000 unless the unions agreed to a shift from contracting-out for payment of affiliation fees to a system of contracting-in.

McDonald, who came under criticism when he called for an 11% increase in MPs' pay.

In his article, he argues that the expenses system introduced by Ipsa, which remains hated by many MPs, has worked. "The egregious behaviour evident in 2009 has stopped: MPs want to work within the rules." Should anyone err, they have to account for themselves to the IPSA Compliance Officer. Which is as it should be," he wrote.

But despite Ipsa's new expense system, the image of greedy MPs continues to resonate in the public's imagination, he says. "Like the mother-in-law joke, the grasping MP has found a place in the British public consciousness. And the caricature is not going anywhere fast."